Tax court disagrees with the IRS on theft loss claimed by estate.
While there is no controversy concerning not having to pay estate taxes on a “theft loss” there can be controversy on what it actually means to an estate when there is a theft as Forbes reports in "Tax Court Allows Estate a Theft Loss Deduction for Property Held by LLC."
In this particular case the deceased owned 99% of the shares in an LLC. All of the assets in that LLC were stolen through a Ponzi scheme. The estate sought to claim this as a theft loss, which the IRS disallowed on the grounds that it was the LLC's loss and not the estate's.
The court reasoned that since the Ponzi scheme reduced the value of the LLC to nothing, that it was a loss to the estate. It ruled that the relevant law just requires that there be a sufficient nexus between the estate's loss and the theft.
In this case since the deceased owned 99% of the LLC, it was appropriate to include the loss in the estate.
This was a case of “first impression” and it is unclear how the ruling will apply in other cases. It is also not known if the ruling will be extended to other entities and not just LLCs.
An estate planning attorney can guide you through the process of the specifics of designing a plan to meet your individual needs.
Reference: Forbes (Sept. 27, 2016) "Tax Court Allows Estate a Theft Loss Deduction for Property Held by LLC."